Wisconsin Court of Appeals Rules That Performance Bonds Cover Warranties Exceeding the Contract's Requirements
September 24th, 2009
The Wisconsin Court of Appeals recently issued a decision of particular interest to sureties issuing performance bonds. In Milwaukee Board of School Directors v. Bitec, Inc., 2009 WL 2871163 (Wis. App. Sep. 9, 2009), the court examined whether a surety that had issued a performance bond for a roofing contractor was bound to repair defects discovered after the expiration of the general one-year warranty contained within the contract.
The contract at issue was formed between the school district and the roofing contractor in September 2002 for the replacement of an elementary school roof. The surety provided a performance bond for the project expressly incorporating the roofing contract but containing no durational language. After the contractor completed the project in December 2002, it issued a "Five-Year Limited Roof Warranty" to the school district as required by the project's specifications.
However, in December 2005, the school district discovered problems in the roof and filed suit against contractor, its supplier, and their insurers. After learning that the contractor had obtained a discharge of liability in bankruptcy, the school district amended its complaint to include the surety. The surety subsequently moved for summary judgment on the grounds that it was not a party to the separate five-year warranty and that the contract's one-year warranty governed, thus barring any claim against the surety. The trial court granted summary judgment in favor of the surety and the school district appealed.
The court began its analysis by noting the general rule that "a surety's obligation is derived from its principal and the liability of the surety is measured by the liability of the principal." Looking to the decisions of other courts in Pennsylvania, Michigan and Louisiana, it found that the majority of courts held performance bond sureties liable for latent defects in their principals' work where the bonds were conditioned on the principals' faithful performance of all of their obligations under the contract. Applying this rationale to the instant case, although the roofing contract contained a one-year warranty, the five-year warranty contained within the specifications bound the contractor, and thus the surety, to remedy any defects discovered in the roof within the five-year period. The court also rejected the surety's argument that the provision of the five-year warranty after the execution of the roofing contract made the five-year warranty separate and distinct from the roofing contract, finding that the warranty was expressly contemplated within the specifications. Therefore, the court reversed the trial court and held that the surety was liable for all defects the school district could prove on remand.
The court also provided useful guidance for sureties eager to avoid this result. A surety can incorporate into the performance bond a specific provision limiting the surety's financial exposure, or one stating that any warranty language in the contract is excluded by the terms of the performance bond. Alternatively, the surety can expressly limiting the duration of the effectiveness of the performance bond. According to the Wisconsin Court of Appeals, either of these provisions could reduce or eliminate a surety's financial exposure to lengthy or indefinite warranty periods.
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Categories: Legal Updates